Innovation for legal service providers crucial, says report

With the steep rise in in-house legal departments, rapidly evolving technology, heightened use of alternative legal providers and the explosion of new regulations as businesses continue to expand across the globe, a new report from McCarthy Tétrault recommends legal service providers reinvent to adapt or die.

With the steep rise in in-house legal departments, rapidly evolving technology, heightened use of alternative legal providers and the explosion of new regulations as businesses continue to expand across the globe, a new report from McCarthy Tétrault recommends legal service providers reinvent to adapt or die.

Internationally, regulations are proliferating while businesses expand across borders, says the report. Meanwhile, the authors say, in the digital realm, data is multiplying and creating liability for businesses. That means there is a huge increase in corporate legal departments that heightens the need for other lawyers to integrate their expertise with the business world.

“This is a historically unique time for lawyers,” says the report, which is authored by three lawyers at McCarthy Tétrault: Susan Wortzman, a partner and founder of MT>3; Matthew Peters, a partner and national innovation leader; and Judith McKay, the chief client and innovation officer.

The report says that, between 1997 and 2017, the number of in-house lawyers tripled to 105,310 from 34,750 — growing sharply since the 2008 financial crisis. The growth of in-house lawyers was seven-and-a-half times faster than that of law firms, says the report.

Corresponding to this upsurge of in-house lawyers is a rise in the use of alternative fee arrangements and other methods of reducing the external legal cost for in-house departments, says the report. It also states that alternative legal service providers are, therefore, seeing more work with 19 per cent of legal departments outsourcing to them — a number that rises to 38 per cent for large legal departments.

“One of the most significant changes in the last 20 years is the insourcing of legal capabilities into companies,” McKay told Legal Feeds.

Another survey cited in the paper says the majority of Canadian GCs did not expect their in-house departments to grow in the next year. McKay says this raises a question.

“How do you keep driving efficiency and effectiveness while meeting the business needs?” she asks.

One way of becoming more efficient while meeting business needs involves adapting to technological innovation, becoming an expert in the tools it produces, says the report. Alternative service providers help, too. But most important is a greater collaboration between legal departments, law firms, alternate service providers and technology providers, says McKay.

“What we truly need is to truly rethink how legal services are delivered,” she says.

The report says that, in the digital realm over the last two years, more data has been created than in all time previous and 1.7 megabytes is being created every second for every person on Earth. The authors predict that, in five years, there will be 50 billion smart connected devices capable of collecting, sharing and analyzing data. This growth in connectivity and the data it leaves behind will mean growth in business for lawyers, as it leads to an “exponential” expansion in contracts businesses “need to draft, comply with and manage,” they write.

“Digitization creates tremendous opportunities to collect, analyze and monetize data using artificial intelligence but also tremendous risk if not implemented thoughtfully,” the report states.

“Doing discovery for litigation is impossible to do now without machine-learning technology,” McKay told Legal Feeds. “It creates tremendous value, because all of this data is extremely valuable. But making sure that you get the opportunities from the data and in a legally defensible way is extremely important and complex as well.”

The authors cite a 2017 survey of more than 200 in-house lawyers — mostly GCs and heads of the legal department — which found that “innovative service delivery through technology” was more important than personal relationships, corporate social responsibility and the size and reach of international networks when it comes to choosing external law firms with whom to work. Another survey from 2018 from Acritas showed that 69 per cent of U.S. corporate legal departments surveyed said they hadn’t seen their outside law firms and other legal service providers innovate in the last year.

“To be relevant, law firms need to accelerate their commitment to innovation and transformation,” says McKay.

Globalization has stretched corporate clients across the world, producing as much risk as can come from every nation on Earth’s individual legal systems plus much more. The paper illustrates the extent to which regulations are multiplying. In 2003, there were 2,000 regulations worldwide. That increased to 16,000 as of 2018. Non-compliance will sting more than ever; for example, four per cent of annual global turnover or $34,795,945 for violating the EU General Data Protection Regulation and $10 million for violating Canada’s Anti-Spam Legislation.

Inhouse counsel say managing regulatory compliance is their biggest business law challenge, and data security, privacy and other technology-related issues are among the top as well.

“Regulations are exploding,” McKay says. “The consequences of non-compliance are greater than ever before with reputational risks and massive fines.”

“So the stakes are very high. And that’s not even counting the reputational impact that can happen with being non-compliant,” she says.